Exhibit (c)(2)
[LOGO]
Presentation to the
Special Committee of the Board of Directors
of Kenetech Corporation
- --------------------------------------------------
Strictly Confidential
October 25, 2000
[LETTERHEAD OF HOULIHAN LOKEY HOWARD & ZUKIN]
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Table of Contents
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Section
Executive Summary................................................ A
Company Overview................................................. B
Overview of KCH Transaction...................................... C
Independent Valuation Assessment of Kenetech Corp................ D
Consideration of Strategic Alternatives.......................... E
Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
Executive Summary
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Executive Summary
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Background
We understand that KC Holding Corporation ("KCH" hereinafter) proposes to
cause KC Merger Corp. ("KCM" hereinafter), a direct wholly-owned subsidiary
of KCH, to make a tender offer (the "Offer") to purchase any and all of the
shares of common stock of Kenetech Corporation (the "Company" or "Kenetech"
hereinafter), together with its associated rights attached thereto issued
pursuant to the Rights Agreement (collectively, the "Shares"), at a
purchase price of $1.04 per Share, (the "Offer Price"), net to the seller
in cash, without interest thereon. Pursuant to the draft Agreement and Plan
of Merger dated October 25, 2000 (the "Merger Agreement" hereinafter) among
KCH, KCM and Kenetech, KCM will merge with and into Kenetech. Following the
merger, the separate corporate existence of KCM will cease and Kenetech
shall continue as the surviving corporation. Mark D. Lerdal, the President,
Chief Executive Officer and Director of Kenetech has entered into a
subscription and contribution agreement with KCH and KCM pursuant to which
he agreed to contribute his shares of the Company to KCH in exchange for
capital stock of KCH. Such transaction and all related transactions are
referred to collectively herein as the "Transaction".
Scope of Engagement
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. ("Houlihan Lokey")
has been retained by Kenetech to assist the Special Committee of the Board
of Directors of the Company (the "Special Committee") in evaluating the
terms of the Transaction and render an opinion (the "Opinion") as to the
fairness, from a financial point of view, to the stockholders of the
Company (except Mr. Mark D. Lerdal) of the consideration offered to them in
connection with the Transaction. Additionally, Houlihan Lokey will assist
the Special Committee in reviewing and negotiating terms of the proposed
financial structure and Transaction and providing assistance in connection
with defining, from a financial point of view, strategic and financial
objectives.
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. 1
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Executive Summary
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Summary of Recent Trading Activity
The following table highlights the recent trading activity for the
Company's common stock.
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Current Stock Price/[a]/ $0.71
52 Week High $0.79
52 Week Low $0.49
Thirty Day Average/[a]/ $0.73
Three Month Average/[a]/ $0.72
Six Month Average/[a]/ $0.70
One Year Average/[a]/ $0.65
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/(a)/ Stock price as of October 24, 2000
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Summary of Analysis Completed
In assessing the financial fairness of the Transaction to the Company's
stockholders (except Mr. Mark D. Lerdal) we have: (i) analyzed the terms
and conditions of the Transaction; (ii) performed certain valuation
analyses of the Company; and (iii) considered the possibility and
implications of completing certain alternatives to the Transaction.
Summary of Due Diligence Performed
In connection with this Opinion, we have made such reviews, analyses and
inquiries, as we have deemed necessary and appropriate under the
circumstances. Among other things, we have:
1. reviewed the Company's annual reports to shareholders on Form 10-K for
the fiscal years ended 1995 through 1999, the quarterly report on Form
10-Q for the two quarters ended June 30, 2000 and the internal Company
financial statements for the period ending September 30, 2000, which
Company's management has identified as being the most recent current
financial statements available;
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. 2
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Executive Summary
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2. met with certain members of the Company management, auditors and tax
advisors, and Astoria Energy, LLC to discuss the operations, financial
condition, future prospects and projected operations and performance
of the Company;
3. discussed the operations, financial condition, future prospects and
projected operations and performance of the companies in which
Kenetech has invested ("Company Investments") with Company management
and certain members of the senior management of the Company
Investments;
4. reviewed the Merger Agreement and the letter from the Company dated
October 25, 2000 ("Company Letter");
5. reviewed financial statements and forecasts and projections for
certain of the Company Investments;
6. reviewed the historical market prices and trading volume for the
Company's publicly traded securities;
7. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Company and the Company
Investments;
8. reviewed various documents relating to the Company and Company
Investments;
9. reviewed various documents provided by counsel to the Special
Committee relating to the cause of action filed in the Delaware Court
of Chancery styled Kohls v. Duthie et al. and relied on the views
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expressed by counsel to the Special Committee with respect to it; and
10. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
Assumptions and Limiting Conditions
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of the Company and the Company Investments,
where applicable, and that, except to the extent
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. 3
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Executive Summary
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provided for in the Company Letter, there has been no material change in
the assets, financial condition, business or prospects of the Company and
Company Investments, where applicable, since the date of the most recent
financial statements made available to us. We have not independently
verified the accuracy and completeness of the information supplied to us
with respect to the Company and the Company Investments and do not assume
any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties, assets or
liabilities of the Company and the Company Investments. Our opinion is
necessarily based on business, economic, market and other conditions as
they exist and can be evaluated by us at the date of this letter.
Houlihan Lokey's conclusions stated herein are directed to the Special
Committee and the Board of Directors, address only the fairness of the
consideration to be received by the stockholders (except Mr. Mark D.
Lerdal) in the Transaction and do not address the relative merits of the
Transaction, any other matter provided for or contemplated by the Merger
Agreement or any other transaction that may have been available as an
alternative to the Transaction whether or not any such alternative could be
or could have been achieved, or the terms upon which any such alternative
transaction could be or could have been achieved. Further, this
presentation addresses only issues related to the fairness, from a
financial point of view to the stockholders (except Mr. Mark D. Lerdal), of
the price for the sale of common stock, and we do not express any views on
any other terms of the Merger Agreement, or any other agreement. In
addition, we have assumed that in the course of obtaining the necessary
regulatory and third party consents for the Transaction, no delay or
restrictions will be imposed that will have a material adverse effect on
the contemplated benefits of the Transaction.
Our conclusions stated herein do not constitute a recommendation to the
Special Committee, the Board of Directors or stockholders as to whether the
stockholders should tender their shares of common stock in the Offer or how
the Special Committee, the Board of Directors or the stockholders should
vote with respect to any matter relating to the Transaction, and do not
address the underlying business decisions of the Board and the Special
Committee to enter into the Transaction. We have not been requested to, and
did not, solicit third party indications of interest in acquiring all or
any part of the Company.
All valuation methodologies that estimate the net worth of an enterprise on
a going-concern basis are predicated on numerous assumptions pertaining to
prospective economic and operating conditions. Unanticipated events and
circumstances may occur and actual results may vary from those assumed. The
variations may be material.
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. 4
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Executive Summary
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This presentation is furnished solely to the Special Committee, the Board
of Directors and the Company. This presentation may be relied upon only by
the Special Committee and the Board of Directors and may not be relied upon
by any other person, may not be quoted, referred to or reproduced at any
time, in any matter or for any other purpose without our express, prior,
written consent, which consent will not be unreasonably withheld (except
that it may be filed in total by the Company as required under applicable
federal securities laws). This presentation is delivered to the Special
Committee subject to the conditions, scope of engagement, limitations and
understandings set forth in this presentation and in our engagement letter
dated August 24, 2000, and subject to the understanding that the
obligations of Houlihan Lokey in the Transaction are solely corporate
obligations, and no officer, director, employee, agent, shareholder or
controlling person of Houlihan Lokey shall be subjected to any personal
liability whatsoever to any person, nor will any such claim be asserted by
or on behalf of you or your affiliates. Houlihan Lokey has been retained on
behalf of the Special Committee, and has delivered this presentation to the
Special Committee and also to the other members of the Board of Directors.
Houlihan Lokey's presentation will not be used for any other purpose other
than in connection with the Transaction.
Conclusions
In summary, it is our opinion that the consideration to be received by the
stockholders of the Company (except Mr. Mark D. Lerdal), pursuant to the
Transaction, is fair from a financial point of view.
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. 5
Company Overview
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Company Overview
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Company Profile
Kenetech is a Delaware corporation that has historically been involved in
the development, construction and management of independent power projects.
During 1995 and 1996 the Company experienced significant liquidity
constraints and in an effort to relieve itself from such constraints the
Company initiated the sale of a significant amount of its assets. Today,
Kenetech continues in project development activities at this time; however,
it has ceased its construction and management activities and now has
privately held minority interest investments in the power generation,
Internet, technology and biotechnology sectors.
. Kenetech went public in September 1993 at $16.50 per share. The
Company's stock is currently traded at $0.71.
. Company's stock is thinly traded without meaningful equity analyst
coverage.
Current Ownership Profile
The largest holders of Kenetech's common stock as of September 2000 are
summarized in the table below:
Holder Shares Held % Percent
Mark Lerdal 11,365,458 35.6%
James E. Kreuger Trust 1,500,000 4.7%
Stephen Massocca 447,000 1.4%
Taube Family Foundation 168,500 0.5%
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Total Shares Held by Large Shareholders & Insiders 41.6%
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. 6
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Company Overview
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Summary Financial Information
Kenetech Summary Financial Information
Balance Sheet as of 9/30/2000
(In 000's)
ASSETS
Cash and Cash Equivalents $ 3,514
Funds in Escrow 125
Accounts Receivable 10
Traded Debt Securities 18,831
Other Current Assets 2,075
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Total Current Assets 24,555
Project Development Advances:
OSB Chateaugay LLC 844
Astoria Energy LLC 4,974
Whinash 350
Held-to-maturity Debt Securities:
Indosuez Capital Fuding VI, Ltd. 2,500
ServiSense.com, Inc. 1,000
Other Investments:
Astoria Energy LLC 6,000
7 Other Investments 2,233
Other Assets 138
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Total Assets $42,594
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LIABILITIES & STOCKHOLDERS' EQUITY
Accounts Payable $ 1,499
Accrued Liabilities & Reserves 2,370
Other Current Liabilities 122
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Total Current Liabilities 3,990
Accrued Liabilities 905
Deferred Benefit for Deconsolidated Subsidiary Losses 10,305
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Total Liabilities 15,201
Total Stockholders Equity 27,393
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Total Liabilities and Stockholders' Equity $42,594
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Houlihan Lokey Howard & Zukin Financial Advisors, Inc. 7
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Company Overview
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Kenetech Historical Summary Financial Information - Balance Sheet
Fiscal Year Ending Dec 31: As of
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(In 000's) 1997 1998 1999 9/30/2000
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ASSETS
Cash and Cash Equivalents/Funds in Escrow $ 8,491 $ 67,902 $ 15,605 $ 3,639
Traded Debt Securities 0 0 31,388 18,831
Total Current Assets 86,634 84,461 47,567 24,555
Total Assets 90,586 84,485 50,097 42,594
LIABILITIES & STOCKHOLDERS' EQUITY
Total Current Liabilities 203,179 $ 53,072 $5,679 $ 3,990
Total Long-term Liabilities 19,112 34,793 11,473 11,211
Total Stockholders Equity (131,705) (3,380) 32,945 27,393
Kenetech Historical Summary Financial Information - Income Statement
Fiscal Year Ending Dec 31: YTD
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(In 000's) 1997 1998 1999 9/30/2000
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Revenues $ 40,993 $ 251,921 $ 5,431 $ 1,551
Operating Income (20,041) 208,728 (325) (541)
Operating Income Margin -48.9% 82.9% -6.0% -34.9%
EBITDA 8,406 214,020 (294) (517)
EBITDA Income Margin 20.5% 85.0% -5.4% -33.4%
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. 8
Overview of KCH Transaction
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Overview of KCH Transaction
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Background/Description of Proposal
Over the last several years, the Company has received no
meaningful expressions of interest concerning the acquisition of
the Company, and no discussions have ever resulted in a
definitive offer or proposal. At a meeting of the Board of
Directors held on June 21, 2000, Mr. Lerdal advised the Board of
Directors that he had been contacted by a potential acquisition
group and that the acquisition group had expressed interest in
potentially acquiring the Company.
For that reason, on July 5, 2000 the Board of Directors
established the Special Committee to review and evaluate the
terms and conditions and determine the advisability of a proposed
transaction, communicate with the acquisition group with respect
to terms and conditions of a proposed transaction, determine
whether the transaction is fair to and in the best interest of
the Company and its stockholders, and recommend to the full Board
what action, if any, should be taken by the Company with respect
to the proposed transaction.
In August 2000, the Company received an unsolicited expression of
interest from ValueAct Capital Partners ("VAC") to purchase
Kenetech for $0.95 per share. The August 2000 proposal of $0.95
was rejected as inadequate. After further negotiations by the
Special Committee, the Kenetech Board of Directors authorized the
Special Committee to execute and deliver a letter of intent
("LOI") on September 27, 2000. Among other things, the LOI
provided that the Company would negotiate exclusively with VAC
for 30 days in an attempt to arrive at final terms for VAC's
purchase of Kenetech's stock (through KCH and KCM), excluding the
shares of Mr. Mark D. Lerdal, for $1.04 per share.
VAC proposes to structure the Transaction as a recapitalization
of the Company, in which Mr. Lerdal would "rollover" all of his
existing equity in the Company. The purchase of all of the other
outstanding shares of common stock of the Company would be
effected through an all cash tender offer by KCM. Any shares
remaining after the tender offer would be cashed out at the same
price in a merger of KCM into the Company.
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. 9
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Overview of KCH Transaction
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Following the merger of KCM with and into the Company, the
separate corporate existence of KCM will cease and Kenetech shall
continue as the surviving corporation. The consideration to be
paid in the merger would be identical to that paid in the tender
offer.
The tender offer will be conditioned on KCH receiving at least
85% of the outstanding shares (excluding the shares held by Mr.
Lerdal). Mr. Lerdal has entered into a subscription and
contribution agreement with KCH and KCM pursuant to which Mr.
Lerdal agreed to contribute his shares of Kenetech to KCH in
exchange for shares of KCH. In addition, Mr. Lerdal would enter
into a Voting Agreement with KCH and KCM pursuant to which he
would agree to (i) not tender his shares of Kenetech in the
Transaction and (ii) grant to KCH a proxy with respect to voting
of such shares.
DEAL OBSERVATIONS
Adjusted Net Asset Value Range
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Low High
--------------------------------
Concluded Range of Adjusted Net Asset Value Per Share $0.96 $1.13
Book Value Per Share As of September 30, 2000
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Stated Book Value Per Share as of September 30, 2000 $0.86
. Price is at a substantial premium to the Company's stock
price prior to disclosure of discussions (a premium of 46.5%
over the current stock price of $0.71).
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. 10
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Overview of KCH Transaction
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OTHER COMMENTS
. Transaction is a going private acquisition with Mr. Mark D. Lerdal,
Chairman, President and Chief Executive Officer of the Company,
contributing his shares of Kenetech to KCH in exchange for shares of
capital stock of KCH.
. VAC will finance the Transaction with equity capital.
. The Merger Agreement contains a modest termination fee (up to
$750,000) payable by Kenetech if a superior proposal is accepted.
. The tender offer is conditioned on KCH receiving at least 85% of the
outstanding shares (excluding the shares held by Mr. Mark D. Lerdal).
. The Merger Agreement contains a "fiduciary out" clause regarding
superior proposals which may arise prior to closing. The Merger
Agreement also contains a "fiduciary out" clause permitting the
Company to withdraw its recommendation of the Offer and/or the merger.
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. 11
Independent Valuation Assessment of Kenetech Corp.
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Independent Valuation Assessment of Kenetech Corp.
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MARKET CAPITALIZATION APPROACH
This approach is based on the premise that the value of a company can be
estimated by analyzing the prices paid by investors for shares of publicly
traded companies with similar characteristics. Value multiples are
determined based on the ratios of current market valuations to operating
performance measurement such as Earnings. The operating performance
measures are adjusted to reflect representative levels and market multiples
are selected on a risk-adjusted basis. By utilizing a variety of derived
multiples, one is able to assess value based on various measures of a
company's operating performance. Another common method of obtaining such
multiples is to examine companies that have recently been sold in the
public marketplace. Where subject company earnings and cash flows or the
prospects thereof are material enough to evaluate, this approach is highly
useful. However, the Company's Investments are predominantly development
stage or start-up companies. These characteristics render the market
capitalization approach virtually impossible to apply in arriving at
reasonable valuation indications for the Company Investments. In such
instances the prior transaction and discounted cash flow approaches provide
more meaningful valuation indications.
PRIOR STOCK TRANSACTION APPROACH
This approach utilizes value indications arrived at in examining prior
stock transactions. This approach is highly relevant to the Company
Investments as most of Kenetech's investments have occurred in the last
nine months.
DISCOUNTED FREE CASH FLOW APPROACH
The discounted free cash flow ("FCF") approach is based on the premise that
the value of an investment is equal to the present value of the future cash
flows. This approach typically utilizes projected financial statements
prepared by management, including estimates of working and long-term
capital needs, to estimate free cash flows. The free cash flows on a
leveraged basis are discounted, at the subject company's equity rate of
return. A terminal value is calculated assuming a sale of the company in
the final year of the forecast and this amount is discounted to the present
at the subject company's equity rate of return.
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. 12
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Independent Valuation Assessment of Kenetech Corp.
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ADJUSTED NET ASSET APPROACH
The adjusted net asset approach differs from the market capitalization,
prior transactions and FCF approaches in that it focuses on individual
asset and liability values from the company's balance sheet, which are
adjusted to fair market value, in contrast to the market capitalization and
FCF approaches which focus on the aggregate returns generated by all the
company's assets. This going-concern approach is appropriate in instances
where the subject company has a heavy investment in tangible assets or
where operating earnings are insignificant relative to the value of the
underlying assets, such as in holding companies. Kenetech's stock was
valued using the adjusted net asset approach.
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. 13
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Independent Valuation Assessment of Kenetech Corp.
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(In 000's)
Actual As of Adjusted
9/30/00 Net Assets Value
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ASSETS
Current Assets:
Cash and Cash Equivalents $ 3,514 $ 3,514 - $ 3,514
Funds in Escrow 125 125 - 125
Accounts Receivable 10 10 - 10
Traded Debt Securities 18,831 16,537 - 16,537
Prepaid 228 178 - 178
Interest Receivable 347 347 - 347
Insurance Proceeds Receivable 1,500 1,500 - 1,500
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Total Current Assets 24,555 22,211 - 22,211
Project Development Advances:
OSB Chateaugay LLC 844 1,300 - 2,000
Astoria Energy LLC 4,974 8,500 - 9,000
Whinash 350 99 - 123
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Project Development Advances: 6,168 9,899 - 11,123
Held-to-maturity Debt Securities:
Indosuez Capital Fuding VI, Ltd. 2,500 2,500 - 2,500
ServiSense.com, Inc. 1,000 900 - 900
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Total Held-to-maturity Debt Securities 3,500 3,400 - 3,400
Other Investments:
Astoria Energy LLC 6,000 6,500 - 10,000
Francisco Partn er, L.P. 840 840 - 840
Draper Atlantic Venture Fund II, L.P. 250 250 - 250
Sage Systems, Inc. 500 500 - 800
Odin Millenium Partnership, Ltd. 250 1,050 - 1,200
GenPhar, Inc. 250 250 - 250
Interactive International Commerce, Ltd 100 150 - 250
BreightBurn Energy Company, LLC 43 43 - 43
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Total Other Investments 8,233 9,583 - 13,633
Property, Plant and Equipment, net 34 0 - 34
Other Assets 60 60 - 60
Capitalized Expenses 44 0 - 0
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Total Assets $ 42,594 $ 45,152 - $ 50,461
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LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilties:
Accounts Payable $ 1,499 $ 4 - $ 4
Accrued Liabilities & Reserves 2,370 1,425 - 1,425
Current Taxes Payable 122 122 - 122
Other Notes Payable 0 0 - 0
Accrued Stock Repurchase Obligation 0 0 - 0
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Total Current Liabilities 3,990 1,551 - 1,551
Accrued Liabilities 905 887 - 887
Deferred Benefit for Deconsolidated Subsidiary Losses 10,305 4,741 - 4,073
---------- ------------ ------------
Total Liabilities 15,201 7,179 - 6,511
Stockholders' Equity:
Common Stock 3 N/A - N/A
Additional Paid-in Capital 216,318 N/A - N/A
Accumulated Deficit (188,928) N/A - N/A
---------- ------------ ------------
Total Stockholders' Equity 27,393 37,973 - 43,949
Total Liabilities and Stockholders' Equity $ 42,594 $ 45,152 - $ 50,461
Indicated Range of Adjusted Net Asset Value $ 37,973 $ 43,949
Present Value of Overhead Costs ($5,514) ($4,154)
Trapped in Capital Gains (2,006) - (4,130)
Concluded Range of Adjusted Net Asset Value - 30,452 - 35,666
Shares 31,970.164 - 31,970.164
Indicated Range of Adjusted Net Asset Value Per Share $ 0.95 - $ 1.12
Plus: Derivative Action Value Increment $ 0.01 - $ 0.01
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Concluded Range of Adjusted Net Asset Value Per Share $ 0.96 - $ 1.13
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Houlihan Lokey Howard & Zukin Financial Advisors, Inc. 14
STRICTLY CONFIDENTIAL Special Committee of Board the of Directors
Independent Valuation Assessment of Kenetech Corp.
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KWND% Kenetech
Value Indication Range Ownership $ Ownership Range
----------------------------- ----------- ------------------------
ADVANCES:
Astoria Energy LLC
Prior Transaction #1 - Kenetech N/A - N/A N/A $4,974,000 - $ 4,974,000
Free Cash Flow Approach N/A - N/A N/A $8,568,347 - $ 9,151,527
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OSB Chateaugay LLC
Prior Transaction #1 - Kenetech N/A - N/A N/A $ 844,107 - $ 844,107
Prior Transaction #2 - Willamette $ 3,500,000 $ 4,000,000 N/A $1,542,733 - $ 1,676,067
Free Cash Flow Approach #1 $ 3,500,000 - $ 4,000,000 N/A $ 983,438 - $ 1,086,563
Free Cash Flow Approach #2 $43,275,852 - $48,374,207 10.0% $4,327,585 - $ 4,837,421
----------- ----------- ---------- -----------
Indicated Value
Whinash
Prior Transaction #1 - Kenetech N/A - N/A N/A $ 99,020 - $ 123,611
----------- ----------- ---------- -----------
Indicated Value
DEBT SECURITIES:
Indosuez Capital Funding VI, Ltd.
Prior Transaction - Kenetech N/A - N/A N/A $2,500,000 - $ 2,500,000
----------- ----------- ---------- -----------
Indicated Value
ServiSense.com, Inc.
Prior Transaction #1 - Kenetech N/A - N/A NA $1,000,000 - $ 1,000,000
----------- ----------- ---------- -----------
Indicated Value
INVESTMENTS:
Astoria Energy LLC
Prior Transaction #1 - Kenetech $30,000,000 - $30,000,000 20.0% $6,000,000 - $ 6,000,000
Free Cash Flow Approach $38,293,022 - $58,755,113 18.8% $7,199,088 - $11,045,961
----------- ----------- ---------- -----------
Indicated Value
Francisco Partners L.P
Prior Transaction #1 - Kenetech N/A - N/A N/A $ 840,000 - $ 840,000
----------- ----------- ---------- -----------
Indicated Value
Draper Altantic Venture Fund II, L.P.
Prior Transaction #1- Kenetech N/A - N/A N/A $ 250,000 - $ 250,000
----------- ----------- ---------- -----------
Indicated Value
Sage Systems, Inc.
Prior Transaction #1 - Kenetech $ 7,142,857 - $ 7,142,857 7.0% $ 500,000 - $ 500,000
Prior Transaction #2 $14,457,153 - $14,457,153 4.2% $ 607,200 - $ 607,200
Discounted Cash Flow $33,745,034 - $57,699,794 4.2% $1,417,291 - $ 2,423,391
----------- ----------- ---------- -----------
Indicated Value
Odin Millenium Partnership, Ltd.
Prior Transaction #1 - Kenetech $80,000,000 - $90,000,000 1.5% $1,200,000 - $ 1,350,000
Prior Transaction #2 $28,500,000 - $28,500,000 1.5% $ 427,500 - $ 427,500
----------- -----------
Indicated Value 1.5% $1,050,000 - $ 1,200,000
GenPhar, Inc.
Prior Transaction #1- Kenetech $35,714,286 - $35,714,286 0.7% $ 250,000 - $ 250,000
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Indicated Value
Interactive International Commerce, Ltd.
Prior Transaction #1 N/A N/A N/A $ 33,333 - $ 33,333
Prior Transaction #2 - Kenetech $33,333,333 - $33,333,333 N/A $ 100,000 - $ 100,000
Prior Transaction #3 N/A N/A N/A $ 299,997 - $ 299,997
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Indicated Value
BreightBurn Energy Company, LLC
Prior Transaction #1- Kenetech N/A - N/A N/A $ 42,500 - $ 42,500
----------- ----------- ---------- -----------
Indicated MVE Range
--------------------
Low High
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ADVANCES:
Astoria Energy LLC
Prior Transaction #1 - Kenetech
Free Cash Flow Approach
$8,500,000 - $ 9,000,000
OSB Chateaugay LLC
Prior Transaction #1 - Kenetech
Prior Transaction #2 - Willamette
Free Cash Flow Approach #1
Free Cash Flow Approach #2
Indicated Value $1,300,000 - $ 2,000,000
Whinash
Prior Transaction #1 - Kenetech
Indicated Value $ 99,000 - $ 123,000
DEBT SECURITIES:
Indosuez Capital Funding VI, Ltd.
Prior Transaction - Kenetech
Indicated Value $2,500,000 - $ 2,500,000
ServiSense.com, Inc.
Prior Transaction #1 - Kenetech
Indicated Value $ 900,000 - $ 900,000
INVESTMENTS:
Astoria Energy LLC
Prior Transaction #1 - Kenetech
Free Cash Flow Approach
Indicated Value $6,500,000 - $10,000,000
Francisco Partners L.P
Prior Transaction #1 - Kenetech
Indicated Value $ 840,000 - $ 840,000
Draper Altantic Venture Fund II, L.P.
Prior Transaction #1- Kenetech
Indicated Value $ 250,000 - $ 250,000
Sage Systems, Inc.
Prior Transaction #1 - Kenetech
Prior Transaction #2
Discounted Cash Flow
Indicated Value $ 500,000 - $ 800,000
Odin Millenium Partnership, Ltd.
Prior Transaction #1 - Kenetech
Prior Transaction #2
Indicated Value $1,050,000 - $ 1,200,000
GenPhar, Inc.
Prior Transaction #1- Kenetech
Indicated Value $ 250,000 - $ 250,000
Interactive International Commerce, Ltd.
Prior Transaction #1
Prior Transaction #2 - Kenetech
Prior Transaction #3
Indicated Value $ 150,000 - $ 250,000
BreightBurn Energy Company, LLC
Prior Transaction #1- Kenetech
$ 42,500 $ 42,500
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. 15
- --------------------------------------------------------------------------------
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
- --------------------------------------------------------------------------------
Independent Valuation Assessment of Kenetech Corp.
-----------------------------------------------------------------------
Orderly Liquidation Approach
This approach implies that the firm is no longer a going concern and
the value lies not within the expected future earnings of the assets,
but in the expected fair market value of the assets less (i) any
discount for the orderly sale and (ii) the liabilities of the firm.
-------------------------------------------------------------------------------------------------------------------
Proceeds from Liquidation
of Salable Assets (000's)
Adjusted Net Asset Value % on Sale Proceeds
------------------------------ ------------------ -------------------------
Assets Low High Low High Low High
-------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents 3,514 - 3,514 100% - 100% $ 3,514 - $ 3,514
Fund in Escrow 125 - 125 80% - 100% 100 - 125
Accounts Receivable 10 - 10 70% - 80% 7 - 8
Traded Debt Securities 16,537 - 16,537 100% - 100% 16,537 - 16,537
Prepaid 178 - 178 0% - 0% 0 - 0
Interest Receivable 347 - 347 100% - 100% 347 - 347
Insurance Proceeds 1,500 - 1,500 100% - 100% 1,500 - 1,500
Project Development Advances:
OSB Chateaugay LLC 1,300 - 2,000 50% - 70% 650 - 1,400
Astoria Energy LLC 8,500 - 9,000 50% - 70% 4,250 - 6,300
Whinash 99 - 123 10% - 50% 10 - 62
Held-to-maturity Debt Securities:
Indosuez Capital Fuding VI, Ltd. 2,500 - 2,500 70% - 90% 1,750 - 2,250
ServiSense.com, Inc. 900 - 900 60% - 80% 540 - 720
Other Investments:
Astoria Energy LLC 6,500 - 10,000 50% - 70% 3,250 - 7,000
Francisco Partner, L.P. 840 - 840 70% - 90% 588 - 756
Draper Atlantic Venture Fund II, L.P. 250 - 250 70% - 90% 175 - 225
Sage Systems, Inc. 500 - 800 10% - 50% 50 - 400
Odin Millenium Partnership, Ltd. 1,050 - 1,200 40% - 60% 420 - 720
GenPhar, Inc. 250 - 250 10% - 50% 25 - 125
Interactive International Commerce, Ltd. 150 - 250 10% - 50% 15 - 125
BreightBurn Energy Company, LLC 43 - 43 10% - 50% 4 - 21
Property, Plant and Equipment, net 0 - 34 0% - 50% 0 - 17
Other Assets 60 - 60 40% - 60% 24 - 36
---------------- ----------- ---------- ------------
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Total $45,152 $50,461 $33,756 - $42,188
-------------------------------------------------------------------------------------------------------------------
Less: Administrative and Operating Costs in Liquidation, 5% of Total Assets 5.0% 1,688 - 2,109
---------- ------------
===================================================================================================================
Total Proceeds Available to Claims $32,068 $40,078
===================================================================================================================
Claims to Proceeds from Liquidation (000s')
Revised Market Value % Recovery Recovery
------------------------------ ------------------ -------------------------
Claims Low High Low High Low High
-------------------------------------------------------------------------------------------------------------------
Account Payable 4 - 4 100% 100% $ 4 - $ 4
Accrued Liabilities 1,425 - 1,425 100% 100% 1,425 - 1,425
Current Taxes Payable 122 - 122 100% 100% 122 - 122
Accrued Liabilities 887 887 100% 100% 887 - 887
Deferred Benefit for Deconsolidated Subsidiary
Losses 4,741 4,073 100% 100% 4,741 - 4,073
---------- ------------
-------------------------------------------------------------------------------------------------------------------
Total Proceeds Before Equity Claim $7,179 $6,511 $ 7,179 - $ 6,511
-------------------------------------------------------------------------------------------------------------------
===================================================================================================================
Total Proceeds Available to Common Equity $24,889 - $33,567
===================================================================================================================
Common Shares Outstanding 31,970.164 31,970.164
---------- ------------
===================================================================================================================
Indicated Total Liquidation Value per Share $0.78 - $1.05
===================================================================================================================
Plus: Derivative Action Value Increment $0.01 - $0.01
---------- ------------
===================================================================================================================
Concluded Total Liquidation Value per Share $0.79 - $1.06
===================================================================================================================
Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
16
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Independent Valuation Assessment of Kenetech Corp.
-------------------------------------------------------------------------
Acquisition Premium Analysis
We analyzed the acquisition premiums (the difference between the
acquisition price and unaffected trading price) paid in acquisitions of a
100% interest of energy services, electric, gas and sanitary services
companies that occurred between 1994 and June 2000. See chart below.
Control Premium Analysis
[GRAPH]
[_] Electrical, Gas, Water & Sanitary Services
[_] Energy Services
[_] All Industry
Source: Mergerstat
Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Independent Valuation Assessment of Kenetech Corp.
----------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
KWND LTM ending Implied Control
Industry 10/18/00 10/18/2000 Premium
Stock Price/[a]/ Premium/*/ KWND Price/[b]/
-------------------------------------------------------------------------------------------------
All Industry $0.71 40.5% $1.00
Energy Services $0.71 23.0% $0.87
Electrical, Gas, Water & Sanitary Supplies $0.71 33.3% $0.95
-------------------------------------------------------------------------------------------------
Implied Range $0.87-$1.00
-------------------------------------------------------------------------------------------------
/[a]/ Stock price 5-days prior to announcement of transaction
/[b]/ Implied control premium price based on Kenetechs stock price as of October 18, 2000
multiplied by the given premia.
/*/ Source: Mergerstat
=================================================================================================
The acquisition premiums implied by the value of the Transaction
consideration being received by the shareholders of the Company is
shown in the following table:
-------------------------------------------------------------------
Kenetech Implied Acquisition
Date Stock Price Premium/[a]/
-------------------------------------------------------------------
1-day prior $0.71 46.5%
5-days prior $0.71 46.5%
20-days prior $0.73 42.5%
60-days prior $0.72 44.4%
90-days prior $0.53 96.2%
180-days prior $0.65 60.0%
-------------------------------------------------------------------
/[a]/ Based upon a per share Transaction price of $1.04.
===================================================================
Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Independent Valuation Assessment of Kenetech Corp.
--------------------------------------------------------------------
Valuation Summary
---------------------------------------------------------------------------------------------------------
Adjusted Net Asset Value Range
---------------------------------------------
Low High
---------------------------------------------
Concluded Range of Adjusted Net Asset Value Per Share $0.96 $1.13
Book Value Per Share As of September 30, 2000
---------------------------------------------
Stated Book Value Per Share as of September 30, 2000 $0.86
Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
Consideration of Strategic Alternatives
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Consideration of Strategic Alternatives
----------------------------------------------------------------------
In evaluating the fairness of the consideration to be received by the
common stockholders (except Mr. Mark D. Lerdal), from a financial
point of view, we considered the expected value to the Kenetech common
stock shareholders of completing the Transaction and certain
alternatives to the Transaction. With regard to each alternative we
qualitatively considered the valuation implications to the Company's
common stock, the probability of successfully completing the
alternative, and the cost and time to implement. The current situation
overview and summaries of strategic alternatives considered are
described below.
Current Situation Overview
. Kenetech's operations consist of managing cash and traded
securities investments, various development stage company
investments and private equity fund investments. The Company's
primary assets currently consist of cash and traded securities. The
Company also has a significant investment in Steinway LLC, which
owns approximately 20% ownership position in Astoria Energy LLC.
. Kenetech's competitive advantage rests in the ability of Mr. Lerdal
to source attractive deals. Mr. Lerdal's expertise is in energy
project development.
. Of the $22.4 million of cash and traded debt securities as of
September 30, 2000, approximately $13.0 million is uncommitted for
future investments.
. Astoria Energy, LLC is in development stage; state approval
processes are continuing as are financing discussions.
. OSB Chateaugay operates in a cyclical industry that is largely
dependent on new home construction.
. The Company's investment commitments in the Francisco and Draper
funds were recently made. The Company has future capital calls and
the cash invested will be inaccessible for an extended period of
time.
. In 1999, the Company declared a dividend of one preferred share
purchase right ("Rights") for each outstanding share of Common
Stock. The Rights are not exercisable until public announcement of
a tender offer or exchange or an investor has acquired 15% or more
ownership.
Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Consideration of Strategic Alternatives
----------------------------------------------------------------------
Status Quo
. The Company's stockholders retain the upside, and the risk, of the
Company's operations.
. Kenetech would continue operating and would likely have entree into
future power development projects and other investments. With
regard to non-power related investments the Company has little
historical experience.
. The Astoria investment is subject to significant milestone risks.
Astoria could be sold at any time through construction financing or
the Company could maintain ownership going forward, depending on
future negotiations.
. The Company could utilize its existing NOL carryforwards, however
the business generates nominal profitability and the utilization of
NOLs would largely occur only in the context of asset sales.
. The Company has a long-term contingent liability provided in its
financial statements of $10.3 million relating to the Deferred
Benefit of Deconsolidated Subsidiary Losses. The $10.3 million
reserve is based upon the judgment of the Company and its advisors
regarding the appropriate amount to be provided under US GAAP. In
determining the value of this liability we have relied on Company
advisors.
. The likelihood, timing and magnitude of the financial impact of
Kohls v. Duthie et al. is uncertain.
. The Company's shares are thinly traded.
Sale To Vac
. VAC provides liquidity at a substantial premium to the currently
traded price. VAC would assume the risk of all liabilities and
upside return of the Company Investments.
. Offer is an all cash offer funded with equity capital,
significantly reducing financing risk.
Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Consideration of Strategic Alternatives
----------------------------------------------------------------------
Sale To Another Strategic Buyer
. There are relatively few strategic buyers for a group of assets as
diverse in nature as Kenetech's.
. The Company's most significant strategic asset is Astoria Energy,
LLC ("Astoria"). Power generation related companies, of which there
are many, present the most likely universe of strategic acquirors
for this asset. Kenetech has held informal discussions with likely
strategic acquirors for Astoria (including Dynagee and Florida
Power & Light). Discussions, with respect to Astoria, have been
only preliminary with no indications of value or ownership.
. The time required to find an alternative buyer and secure a better
offer is uncertain.
. Although the Kenetech's Board is continuously considering various
strategic alternatives, the Company has received no indications of
interest either orally or in written form prior to the VAC offer.
The Company has disclosed in its 10-Q filing that it is "evaluating
all strategic alternatives available to it. The Company has
retained professionals to assist it in such evaluations."
. Kenetech has a substantial contingent liability, which may make
Kenetech unattractive to certain buyers.
. All of Kenetech's investments are privately held minority interest
investments. The nature of these investments may make Kenetech
unattractive to certain buyers.
STRATEGIC ACQUISITIONS
. As size is becoming an increasingly more important factor in a
company's ability to compete in the independent power industry,
Kenetech does not have resources to be able to effect sufficient
strategic acquisitions to reach critical mass.
Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
STRICTLY CONFIDENTIAL Special Committee of the Board of Directors
Consideration of Strategic Alternatives
----------------------------------------------------------------------
Sale To A Financial Buyer
. Kenetech has diverse minority investments in privately held
entities, which may make Kenetech unattractive to certain buyers.
. There may be interest in the speculative nature of the Astoria
investment.
. Kenetech has a substantial contingent liability which may make
Kenetech unattractive to certain buyers.
. Although Kenetech's Board of Directors is continuously considering
various strategic alternatives, the Company has received no
indications of interest either orally or in written form prior to
the VAC offer. The Company has had very preliminary discussions
with two financial buyer groups with no verbal or written
indications.
. The time required to find an alternative buyer and secure a better
offer is uncertain.
Liquidation
. A liquidation of Kenetech's assets does not appear to maximize
shareholder value.
Houlihan Lokey Howard & Zukin Financial Advisors, Inc.